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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Canadian Tire Corporation, Limited (TSE:CTC.A) with a market-capitalization of CA$9.1b, rarely draw their attention. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine CTC.A’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CTC.A here.
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How much cash does CTC.A generate through its operations?
Over the past year, CTC.A has ramped up its debt from CA$5.9b to CA$7.4b , which includes long-term debt. With this rise in debt, CTC.A currently has CA$654m remaining in cash and short-term investments , ready to deploy into the business. Additionally, CTC.A has generated cash from operations of CA$807m in the last twelve months, resulting in an operating cash to total debt ratio of 11%, meaning that CTC.A’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CTC.A’s case, it is able to generate 0.11x cash from its debt capital.
Can CTC.A meet its short-term obligations with the cash in hand?
With current liabilities at CA$5.3b, it seems that the business has been able to meet these obligations given the level of current assets of CA$9.3b, with a current ratio of 1.76x. For Multiline Retail companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CTC.A face the risk of succumbing to its debt-load?
CTC.A is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CTC.A’s case, the ratio of 8.45x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CTC.A ample headroom to grow its debt facilities.